Smart Grid has moved from being a novel concept to a household word, even though it has yet to be fully developed and implemented. Throughout North America and Europe, the debate has evolved from “do we need a Smart Grid” to “how do we do it”. This is unlike most other commercial endeavours. It requires cooperation, openness and the proverbial thinking outside the box. And since the entities that will house a Smart Grid – namely distributors and transmitters – are regulated, any expenditure on developing a smart grid will also typically require a regulator’s blessing. How does a regulator give this blessing?

It is not an easy question, even in a jurisdiction such as Ontario where Smart Grid investment, under certain circumstances, is a deemed license condition for distributors and transmitters. Does a jurisdiction need to have the regulatory framework figured out before there is any hope of the realization of a Smart Grid? Or, will it simply be built one way or another with regulation attempting to stay one step ahead to do its job of protecting the ratepayer.

In many jurisdictions, “Smart Grid” still means “smart meters”. In Ontario, the smart meter journey began in 2004, five years prior to the introduction of the Green Energy Act, with the Province’s Smart Meter Initiative. This prelude to the Smart Grid dance began with the establishment of targets by the Government of Ontario, ultimately for the installation of smart meters for all Ontario customers. The Board developed an implementation plan that included mandatory technical requirements for smart meters and identified regulatory mechanisms for the recovery of costs. The Province now has regular smart meter proceedings in which distributors seek rate approval for recovery of smart meter costs.

Thus, the smart meter dance began with Government directing which dance (the policy). The regulator then set the music with the consultation document, danced to and fro with stakeholders, and arrived at the implementing regulatory framework.

Will the same dance sequence for smart meters work with Smart Grid? We start the same way – with the Government directing the dance in the Green Energy Act. The Act clearly instructs the regulator to dance the Smart Grid dance by adding the following express objective to the Board’s governing legislation: “the facilitation of the implementation of a smart grid in Ontario”. So far so good but the smart meter is but one component of a smart grid, regardless of what definition of “Smart Grid” one adopts. The Green Energy Act thrust the following definition of “Smart Grid” into the province’s Electricity Act, 1998:

“…the advanced information exchange systems and equipment that when utilized together improve the flexibility, security, reliability, efficiency and safety of the integrated power system and distribution systems, particularly for the purposes of,

(a) enabling the increased use of renewable energy sources and technology, including generation facilities connected to the distribution system;
(b) expanding opportunities to provide demand response, price information and load control to electricity customers;
(c) accommodating the use of emerging, innovative and energy-saving technologies and system control applications; or
(d) supporting other objectives that may be prescribed by regulation.”

From the outset, the Smart Grid dance is clearly a more complicated one than the prelude of smart meters. The Smart Grid dance will involve many more dancers, require significantly more choreography, but will still need to permit coordinated free-dancing, as contradictory as that may sound.

In Ontario, who really needs to lead the dance? The actual building of a smart grid in Ontario has arguably been vested in transmitters and distributors under the Green Energy Act which requires the following:

• Every distributor and transmitter will be required to submit to the Board plans for the development and implementation of the Smart Grid in their system; and
• Each distributor and transmitter will be required, as a condition of license, “to make investments for the development and implementation of the smart grid in relation to the licensees’ transmission or distribution systems”.

But the plans are only required when the Board mandates them or, if required by regulation. Theoretically, the Smart Grid dance in Ontario could go on hold right here.

Enter the choreographer. The Green Energy Act authorized the Minister of Energy to issue directives respecting the smart grid that would be required to be considered by the Board when reviewing plans of licensees. On November 23, 2010, the Minister issued such a directive (the “Directive”) to the Board to provide guidance to distributors that propose to undertake Smart Grid activities.

Smart Grid Policy Objectives

The Board’s exercise is to be guided by three major categories of objectives that were set out in the Directive – customer control, power system flexibility and adaptive infrastructure.

The Board began the dance immediately with industry by striking a working group composed of technical experts from various stakeholder groups. This working group considered the objectives articulated above and informed the next stage of the Board’s considerations. On November 8, 2011, the Board expanded the reach of its dance card by issuing a Staff Discussion Paper in Regard to the Establishment, Implementation and Promotion of a Smart Grid in Ontario (“Board Paper”).

Presumably, the Directive’s objectives underlie the value proposition of the Smart Grid. But how does this become translated into a value proposition communicated to the customer and perhaps more importantly, accepted by the customer? The interplay of this objective with that of Smart Grid development is not lost in the Board’s consultation document.

Key Issues

The Board has asked for stakeholder comment on a number of key issues, two of which are particularly important as their resolution could set the philosophy and footprint for the remaining issues and ultimately, the shape of the regulator’s guidance.

Key Issue No. 1 – How should Smart Grid investment be treated?
The Board Paper articulates two potential approaches – (i) Smart Grid as the evolving modernization of the grid, or (ii) Smart Grid investments as discrete and different from “normal” utility practice. The key difference is that the latter approach would involve establishing a list of eligible and non-eligible technologies or activities which would then have rate-setting implications. The Board Paper indicates that this would envisage distinguishing Smart Grid elements from non-Smart Grid or normal elements on the basis of technological categories.

The first approach resonated with the working group struck by the Board as it inherently recognizes that the Smart Grid is the grid of the future. This approach would be the most straightforward to cost recovery and involve a single process for rate applications. The Board Paper emphasizes that serving load and contributing to Smart Grid objectives would have to be complementary and not mutually exclusive. The addition of Smart Grid objectives to traditional tests of reasonable expenditures would be needed to help ensure that the benefits of Smart Grid are not overlooked.

Key Issue No. 2 – In developing principles for the evaluation criteria for the regulated entities, what benefits should the Board recognize?
Regardless of the approach taken to the first key issue, the Board may consider the benefits that should be recognized in its regulatory guidance. Some of these benefits potentially include, as provided in the Minister’s policy guidance, (a) increased efficiency of power delivery, (b) reduced operations and maintenance costs, (c) improved system reliability, (d) integration of renewable energy and distributed resources including conservation and demand management, and (e) enhanced consumer services.

The Board Paper recognizes that not all benefit might accrue only to distributors or its customers. Analysis regarding to whom the benefits accrue would be necessary. The Board Paper further emphasizes that consideration of the benefits should not detract from the Board’s longstanding focus on customer value and reasonable costs.

The first two key issues perhaps encapsulate the most challenging issues to resolve in the regulation of Smart Grid development. The regulator must continue to protect the consumer and ensure reasonable, prudent activity by the entities that it regulates, yet implement what may be characterized as social and economic policy objectives.

Dance… or Opus?
The Smart Grid dance does not end with the Board Paper. A stakeholder conference is planned for February of 2012 following which the Board will determine next steps. It seems the Smart Grid dance is significantly more complex than a “two-step”. But it also seems that a significant part of the dancing population is interested in coordinating steps. While this regulatory exercise is “led” by the Board, stakeholders are intricately involved in every step. In future articles, the author will report on the continuing dance in Ontario and how it compares to those in other jurisdictions.

About the Author

Bernadette Corpuz is a Senior Associate in the Electricity Markets Group of the law firm Borden Ladner Gervais LLP (BLG). As a member of the Electricity Markets Group, Bernadette advises a wide range of energy market participants, including distributors, transmitters, generators, and commercial users with respect to a variety of commercial and corporate transactions related matters, including mergers and acquisitions, financing and energy markets. Bernadette can be reached at bcorpuz@blg.com or 416-367-6747.